An interest-only loan is a mortgage loan in which, the borrower pays only the interest on the principal balance, for a set period of time. Principal balance remains unchanged during the set term. At the end of the interest-only term the borrower has many options, such as:
- may enter an interest-only mortgage
- pay the principal
- convert the loan to a principal and interest payment (or amortized) loan
Interest only commercial mortgages can play an important role in helping a business trying to get off the ground. When finding cash flow for the investment is difficult, interest-only mortgage can be a very good option. On the other side interest-only loans represent a somewhat higher risk for lenders, so expect a slightly higher interest rate. Also considering today’s fluctuating real estate market, the borrower may end up paying more than the actual value of the property when the interest only commercial mortgage loan is finally paid off.